Leasing vs. Purchasing Commercial Real Estate for Your Dermatology Practice
As a dermatologist, your practice’s location is not only a cornerstone of patient care but also a significant financial decision. Choosing between leasing and purchasing commercial real estate requires careful consideration of your long-term goals, financial situation, and operational flexibility. Let’s break down the pros and cons of each option to help you make an informed decision.
Leasing Commercial Space
Leasing is a common choice for new and growing dermatology practices. Here are the key advantages and disadvantages:
Advantages of Leasing
- Flexibility to Relocate or Resize: Leasing provides the freedom to move to a different location if your patient base shifts or your practice outgrows (or underutilizes) the current space. This adaptability is particularly beneficial for newer practices testing the market.
- Tenant Improvement Allowance: Landlords often provide a tenant improvement (TI) budget, which can help cover the cost of renovations and customizations needed to meet medical office standards. This reduces upfront capital investment.
- Lower Initial Costs: Leasing requires less upfront cash compared to purchasing, allowing you to allocate funds toward equipment, staff, or marketing to grow your practice.
Disadvantages of Leasing
- Paying Rent Without Building Equity: Rent payments go to the landlord, meaning you’re not building equity in the property. This can feel like a missed opportunity for long-term wealth building.
- Limited Control Over the Property: Lease agreements often restrict your ability to make significant changes to the property, limiting customization options.
- Triple Net (NNN) Leases: Many commercial leases, especially triple net leases, require tenants to pay for property taxes, insurance, and maintenance in addition to base rent. These costs can add up quickly.
Purchasing Commercial Space
Buying your office space can be a strategic move for established practices with stable income and long-term plans. Here are the pros and cons:
Advantages of Buying
- Be Your Own Landlord: Owning your property gives you complete control over renovations, maintenance, and overall management. You’re no longer subject to a landlord’s rules.
- Tax Benefits: Purchasing allows for significant tax advantages, such as depreciation deductions for the building and its components. The 2017 Tax Cuts and Jobs Act (potentially extended) enables accelerated depreciation of interior improvements, offering substantial deductions in the year the property is placed in service.
- Long-Term Investment: Real estate can appreciate over time, creating an additional asset for your portfolio. Even if you sell your dermatology practice, you can continue to generate income by leasing the property to another tenant.
- Opportunity for Partnership: Ownership allows you to sell shares of the property to other physicians, fostering partnerships and sharing financial responsibilities.
- Stable Costs: Owning stabilizes your monthly expenses compared to potential rent increases in a lease.
Disadvantages of Buying
- High Upfront Costs: Purchasing requires a significant initial investment for the down payment, closing costs, and renovations. This can strain your finances if not carefully planned.
- Reduced Flexibility: Selling or leasing your property if your practice needs change can take time, making relocation more complicated.
- Ongoing Maintenance Responsibilities: As the owner, you are fully responsible for property maintenance, repairs, and upgrades, which can add to your workload and expenses.
Key Considerations
- Practice Longevity: If you’re confident in your practice’s location and long-term success, purchasing may make more sense. For newer practices, leasing offers the flexibility to adapt as your business grows.
- Financial Health: Assess your budget and access to financing. Owning real estate can be a sound investment, but it requires significant capital upfront.
- Market Conditions: Real estate markets vary greatly by location. Work with a knowledgeable commercial real estate agent to understand local trends and opportunities.
- Separate Ownership Entities: If you decide to purchase, consider holding the real estate in a separate entity (e.g., an LLC) from your practice. This structure can provide liability protection and facilitate potential tax benefits.
Final Thoughts
The choice between leasing and purchasing commercial real estate is complex and hinges on your practice’s specific needs and goals. Leasing offers flexibility and lower initial costs, making it ideal for newer or growing practices. Purchasing, on the other hand, provides long-term financial benefits and control but requires a significant upfront investment.
Consult with financial advisors, commercial real estate professionals, and tax experts to evaluate your options thoroughly. Whether you lease or buy, securing the right space for your dermatology practice is a critical step in building a thriving business.
For personalized advice on your dermatology practice’s real estate needs, reach out to professionals experienced in medical office spaces. Your decision today could shape the future of your practice for years to come.